A few days back we received an interesting article or to be more precise some sort of bulletin issued by the IMFG "Institute on Municipal Finance and Governance" titled "Cost Overruns on Infrastructure Projects: Patterns, Causes, and Cures". This article attempts to provide some sort of analysis followed by recommendations as to the reasons why government projects have the nasty tendency to fail when it comes to costs and timelines.

We chose to comment on this article because it provides an insight of how current thinking work when it comes to governments and expenditures. But before we go there it is interesting to take a look at who is actually paying for this in order to understand what kind of biases may be at play.

The article clearly states that the IMFG is funded by the Province of Ontario, the City of Toronto, Avana Capital Corporation, and the TD Bank Group.

It is obvious that the Province of Ontario, or to be more precise the government of Ontario may be very interested in gathering supporting analysis to justify their expenditures. The same goes for the City of Toronto. But What about Avana and TD? Well, it so happens that they are in the business of lending money for mortgages. And guess what? When governments go on a spending spree particularly when they go into "infrastructure" building a lot of people receive a lot of money which conveniently enables them to request a mortgage and buy a house. Wouldn't these two corporations had an ulterior motive to fund the IMFG? Well, we leave this decision to you dear reader. And now, let's dive into the article.

We can at least say that the author does not seem to be fudging numbers. He quotes an analysis that was done in 2011 stating that about 1500 mega-IT project in US and EU had a cost overrun of about 27% and about one in six such projects exhibited costs overrun of over 200%!

As we specified in our article Why Large Government Projects Fail this is just a reflection of government waste and the impossibility of governments to actually make any economic sense because of their underlying political structures. However, the article is of a different opinion providing helpful suggestions for governments to get it right. Let's begin.

THE PROBLEMS

The article begins by stating the problems that government projects face. They are:

Scope changes and change orders

What this simply means is that once the contract was signed politicians go backwards and forwards and keep making changes. We explained why this happens in our article Why Large Government Projects Fail and so we won't repeat the reasons again. It is sufficient to say that this has to do with political inclinations which leads to the pathetic project management. However, strangely enough, private companies do not seem to suffer of this problem to the degree government projects do. Hummmm… how strange…

Handover problems:

This is essentially a problem between contractors, subcontractors, and the government. The issue is quite simple, all those contractors and subcontractors know full well that apparatchiks in charge of public funds are not concerned with the bottom line but with keeping their jobs. Since the one is disconnected from the other, it is quite possible to produce substandard works, to deliver substandard qualities and in essence increase their profits. Thus, the number of conflicts arising from this fact has the tendency to escalate and thus we need to ask ourselves, who is to be blamed? Does this happens in the private sector? Of course not! At least not with this frequency! In other words, this happens because contractors are dealing with the government. This is something that is unique to the government and happens only because the government exists. The blame for this failure cannot be passed on to anything else.

Incomplete studies prior to project approval:

This element has to do again with poor project management precisely because at the government level everything is based on bureaucracy, which is to say paperwork, which supports any process however ludicrous it may be. The classic example of this is the assumption that project execution will be flawless. Among other things papers also support as vague a specification as politicians require. As a consequence of this, incomplete studies -typically lacking pilot projects- are green lighted all the time. Again, we have to ask ourselves, does this happen in the private sector? And the answer is usually not! This does not happen because most businesses are interested in the bottom line which, low and behold, requires that projects are actually successful! Again, this is something that's quite unique to governments and the only solution is to get governments out to this process altogether.

Inflation in labor and material costs:

This is quite funny because the author of the article looks at inflation as a planning failure and not at what it actually is; Government printing money. Thus, inflationary issues are to be blame squarely on the government because only the government is printing money! Thus, if we remove the government from the business of printing money this point goes away altogether overnight.

Inaccurate forecasting:

The article mentions the difficulty of forecasting the costs of large infrastructure projects for reasons such as the use of inappropriate forecasting models or methods or inaccurate underlying assumptions because of incomplete data or dramatic shifts in conditions. Interestingly enough, this is exactly the same environment that private enterprise faces day in day out and yet they manage not to screw up so badly. Why is it so? Simple. Private enterprise has the tendency to operate on a "Just in Time" model. Very few companies have the tenacity to invest for the very long future because they understand they clearly that such long-term forecasts are not possible. The government on the other hand operates from a political perspective whereby it does not really matter if the forecast is accurate or not. It only matters the current political reaction. It is because of this reason that we get large "infrastructure" projects when the economy is in the dumps. It's not that we actually need those infrastructure projects but that it looks good with voters to see the government doing something rather than nothing. It is also true that as voters have short term memory, they will remember this temporary economic revival up to and including the next election, point at which all this "stimulus" will run its course and the economy will then be much worse off. Again, this is purely a political (which is to say governmental) issue and which has absolutely nothing to do with the requirements of the people that actually pay for those projects (i.e. you, and us and every other taxpayer). Is then a surprise at all that governments cannot forecast accurately? Of course not. When forecasting is driven by political necessity the outcome is failure. As programmers say "garbage in, garbage out".

Project delays:

The article mentions challenges in sourcing materials or workers, or dispute among contractors or other alterations to schedules such as relocations of services (water, electric) or communication delays. Strangely enough, again, private projects do not seems to have this problem, at least not to this degree. Why? Because sourcing materials are typically subject to contracts containing penalty clauses thus incentivating suppliers to… Well… Supply on time! Contractors are dealt in the same manner. Service relocations are effected efficiently because of proper planning and so on. Project delays of private enterprise are typically minor. And so again we need to ask why is that governments seem to have a big problem with something that voluntary agreements between parties seem to fix on a daily basis? The answer again is because apparatchiks are dealing with your money and not theirs. Is then there surprising that they fail to correct delays? Of course not.

Unforeseen events:

Again, we see no reason why private enterprise seems to have no problems with unforeseen events. Government initiatives as well as private ones all operate in the same environment. Yet, governments seem have a much harder time dealing with unknowns than private people. Why is this so? Is because governments attract some sort of negative statistical bias? Of course not. Don't be ridiculous! What happens is that private enterprise typically has a vested interest in getting this problem solved as soon as possible whereby bureaucrats and apparatchiks do not because they are driven by paper. Again, this phenomenon it's unique within a government environment and if we remove the government from the equation the problem solves itself.

Project reporting and performance monitoring:

We commented about this topic quite extensively in our article Why Large Government Projects Fail and therefore we won't be repeating it again in here. Please feel free to read the article.

Note: please see the Glossary if you are unfamiliar with certain words.